Economy up slightly but threats remain, data show

View full sizeRick Bowmer / APChad Ipox grinds and polishes a stainless steel tank top at JV Northwest, in Canby, Ore., in this photo from Aug. 30. Manufacturing grew at a faster pace in September than the previous month, though the overall pace of growth was modest.

Manufacturing expanded in September more than in August, though the pace of growth remains weak, according to a survey by the Institute for Supply Management. The ISM said its manufacturing index rose for the first time in three months. And construction spending increased in August, the government said. The gain was due mostly to a pickup in state and local government projects.

In addition, U.S. auto sales rose in September, largely because consumers bought more pickups and SUVs, U.S. automakers said. Collectively, the reports suggested that the U.S. economy may be able to avoid another recession but will continue to struggle.

Stocks fell sharply in afternoon trading as worries persisted about Europe’s debt crisis. Greece said earlier in the day that it would miss deficit-reduction targets it had agreed to as part of its bailout agreement. That intensified fears that Greece could default on its debts, harming Europe’s economy.

For the United States, economists said the manufacturing and construction reports are consistent with an annual growth rate of about 2 percent to 2.5 percent for the July-September quarter. That would be an improvement from growth of about 0.9 percent in the first six months of the year. But it wouldn’t be enough to reduce the unemployment rate, which is 9.1 percent.

The reports are “mildly encouraging,” said Paul Ashworth, chief U.S. economist at Capital Economics. “But even if the U.S. avoids a recession, economic growth is going to remain lackluster.”

One sign that it will came from the manufacturing report. Manufacturing executives said their volume of U.S. orders shrank for the third straight month. That doesn’t bode well for future production.

Export orders did grow at a faster pace last month than in August, the report found. But some reports Monday suggested that the global economy is slowing. A purchasing managers’ report for the 17 countries that use the euro showed manufacturing is contracting in that region.

And the auto industry’s gains may be temporary, economists said. Sales and production slowed over the summer after the March 11 earthquake in Japan. Recent increases likely reflect the end of supply disruptions stemming from that disaster.

Some analysts expect consumers to buy fewer cars later this year. Edmunds.com last week cut its annual forecast for sales this year, mainly due to worries about the economy.

A clearer reading of the economy will come Friday, when the government will issue the jobs report for September. Economists think employers added somewhere between 50,000 and 100,000 net jobs last month. That’s not enough even to keep up with population growth. And the unemployment rate is expected to remain at 9.1 percent for a third straight month.

The ISM’s manufacturing index rose to 51.6, up from 50.6 in August. A reading above 50 indicates expansion. The increase follows two months of declines. Factories added workers last month, the report said. The ISM is a trade group of purchasing executives.

The manufacturing sector has been a key driver of the economy’s growth since the recession officially ended in June 2009. The index topped 60 for four straight months earlier this year. It rose above 50 one month after the recession ended and has topped that level ever since.

But manufacturing accounts for only about 11 percent of the economy and can do only so much to support the recovery. And manufacturing has slowed in the past several months as consumer spending has weakened in response to high unemployment and stagnant wages. High gas and food prices are also forcing shoppers to cut back in other areas.

Respondents to the survey expressed “concern over the sluggish economy, political and policy uncertainty in Washington, and forecasts of ongoing high unemployment,” said Bradley Holcomb, chair of the ISM’s survey committee.

The report follows other indicators that show the economy is sputtering though still growing. Companies ordered more machinery, computers and other equipment in August, a government report last week showed.

Twelve of the 18 manufacturing industries tracked by the ISM reported growth in September. They include food and beverages; clothing; autos and other transportation equipment; and chemicals. Furniture, paper products, and electrical equipment were among those that contracted.

Construction spending rose 1.4 percent in August, the Commerce Department said. The increase followed a 1.4 percent drop in July, which had been the biggest setback in six months.

Analysts noted that much of the increase stemmed from a jump in spending on government projects, such as roads and schools. But with many states and cities short of cash, gains of that size aren’t expected to continue.

And private construction is still not healthy. Building activity reached a seasonally adjusted annual rate of $799.1 billion. That’s 4.8 percent above an 11-year low hit in March. But it’s barely more than half the $1.5 trillion pace considered healthy.